(MoneyWatch) The European Union's latest bailout plan for Greece couldn't even get out of the press conference announcing it without running into trouble. The move to give Athens an additional two years to meet its deficit targets immediately met with skepticism by critics calling for more details of the plan and with exasperation from IMF chief Christine Lagarde.
Luxembourg Prime Minister Jean-Claude Juncker, with Lagarde sitting next to him, on Monday told reporters that the EU wants to give the Greek government until 2022 to reach its debt-reduction targets. The extension is widely seen as a way for the European nations and private lenders that are contributing to the rescue package to avoid racking up losses.
The announcement of the plan also provoked a remarkable exchange between Juncker and reporters. In answer to a question about whether EU's goal remains to reduce Greece's debt to 120 percent of its GDP, he replied, "The fact is that the target of 120 percent will remain, but the target as far as the time frame is concerned has been postponed to 2022."
When that that caused laughter among the assembled media in the room, Juncker said, "That was not a joke!" Continuing the unwitting comedy, Lagarde, who opposes the debt repayment extension, rolled her eyes and shook her head during the interchange.
One reason for the doubts about the extension -- the EU has not proposed a way for Greece to get the funding it would need in delaying repayment. Pressed on this point, Juncker said cryptically, "We started to discuss a certain number of avenues," without offering specifics. The only clear statement he made on the topic was that the donor nations would not take writedowns on the amount of money owed to them.
This directly contradicts the IMF's stated position, which is that the donors must take a haircut on the money owed to them if the plan is to achieve its stated goal of repairing Greece's economy. Under the current lending arrangement, most of the money Greece receives from foreign sources does not go to the nation's government, but rather to loan payments to lenders providing bailout funds.
According to a just leaked EU report, Greece's debt-to-GDP ratio is expected to hit 190 percent next year. When it does about 60 percent of the nation's public debt will be official debt most of which is owed to EU member states. In one sense Greece's years of budget cuts will pay off next year when its primary balance is expected to reach zero. When it does the Greeks will only have a budget deficit because of the interest payments they must make on their official debt.
If the target is moved to 2022, donor governments could have an easier time coming up with a funding plan because they might only have to cut interest rates on bailout loans. Keeping to the 2020 date would almost certainly require writedowns on those loans, something creditor countries are refusing to do.
The IMF insists that the next version of the oft-revised Greek bailout plan include a credible debt-reduction proposal. In the eyes of most analysts, credibility has been sorely lacking in all the schemes so far put into action. Under the bailout plan that is now being revised, Greece's debt was expected to fall to 120 percent of GDP by 2020. That would be challenging given the severe depression gripping Greece's economy.
Since then the nation's problems have only gotten worse. Last month the IMF said that Greece's failing economy had forced it to revise its estimate of the country's public debt for 2013 from 160.9 percent of GDP, as the fund stated in April, to 181.8 percent.